Patented Dyneema Technologies Will Improve Future Military And Law Enforcement Protection

Key Takeaways

• Avient's strategic focus on intersecting trends and high-growth markets with scalable platforms aims to drive revenue and margin expansion.
  
• Innovation in Dyneema and diversified growth vectors like healthcare support earnings growth and shareholder returns.
  
• Cancellation of the ERP system and foreign exchange challenges could pose operational and financial risks, impacting Avient's future earnings and stability amid macroeconomic uncertainties.

Catalysts

Operates as a formulator of material solutions in the United States, Canada, Mexico, Europe, South America, and Asia.

• Avient's new strategic approach aims to intersect secular trends and high-growth markets with its technologies to create scalable product platforms, which is expected to drive organic revenue growth and potential margin expansion.
  
• The company is focusing on innovation in its Dyneema portfolio, with new patented technologies that offer improved protection and weight advantages for military and law enforcement applications, likely enhancing revenue growth and maintaining or improving margins due to proprietary products.
  
• Strategic incentives and compensation plans align employee focus with core growth objectives, driving performance and potentially improving net margins and earnings through enhanced operational discipline and sales effectiveness.
  
• Avient's decision to halt the S/4HANA ERP system implementation and pursue alternative solutions should result in cost savings and operational flexibility, benefiting future earnings and cash flow performance.
  
• The company's continued focus on increasing dividends and innovative offerings in Defense, along with diversification in growth vectors such as healthcare and building materials, supports a trajectory of earnings growth and shareholder returns.

Avient Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avient's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 7.0% in 3 years time.
• Analysts expect earnings to reach $249.7 million (and earnings per share of $2.7) by about April 2028, up from $169.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2028 earnings, up from 15.6x today. This future PE is greater than the current PE for the US Chemicals industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.25%, as per the Simply Wall St company report.

Avient Future Earnings Per Share Growth

Risks

• The abrupt cancellation of the S/4HANA ERP system implementation could indicate internal operational challenges or shifts in strategic priorities, which may increase operational risks and could affect future earnings.
  
• Unfavorable foreign exchange (FX) fluctuations, due to the strengthening U.S. dollar, present a significant headwind, with 60% of Avient's revenue generated outside the United States, potentially impacting reported revenue and net margins.
  
• While the company reports growth, the overall macroeconomic environment, including uncertainties around interest rate adjustments, consumer sentiment, and global demand, could impact future organic sales growth and earnings.
  
• The decision to increase dividends and the assumption of mid-single-digit growth may not align with potential economic downturns or geopolitical events, such as the outcome of the Russia-Ukraine war, potentially straining cash reserves and impacting net margins.
  
• Strategic reliance on high-growth sectors like defense and law enforcement, despite innovation, faces risks from potential changes in geopolitical conditions or defense budgets, which may result in volatile revenue streams and affect earnings stability.

Valuation

• The analysts have a consensus price target of $49.857 for Avient based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $56.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $249.7 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 8.2%.
• Given the current share price of $28.93, the analyst price target of $49.86 is 42.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.